Not your ordinary inflation

During the 1970s and ’80s, inflation was truly out of control. Prices would increase by 10–14% or more so quickly that consumers would buy things immediately simply to avoid paying substantially more the next month, the next week, or even the next day.

What do you think happens when people buy things immediately, creating high demand? You guessed it: inflation gets worse. The entire U.S. economy was the definition of a self-fulfilling prophecy. We believed prices would go up, so they did.

In fact, NPR’s Planet Money podcast recently discussed and explained this exact phenomenon in the July 17 episode called, “The Great Inflation.” It’s a fascinating look at how our country used to believe you could either have a booming economy (marked by wild inflation) OR minimal inflation (marked by recession).

You had to choose.

Thankfully, then-President Jimmy Carter appointed a smart and spendthrift economist named Paul Volcker as chair of the Federal Reserve. He basically played chicken with the general public to convince them that no matter what they did, he would not flood the market with additional printed dollars. He had to “not blink” as the policy pushed the nation into a recession. When he finally convinced Americans they could trust his approach to the economy and inflation, behaviors followed suit and the economy recovered.

In truth, we beat inflation by changing people’s mindset.

Volcker’s brilliant approach to managing inflation and economic growth is the reason we have been able to benefit from an unprecedented flourishing economy coupled with historically low interest rates. We got to enjoy a booming economy AND minimal inflation for the last decade plus.

We didn’t have to choose. Thank you very much.

(As a personal sidebar, I started my banking career as a bank examiner with the Federal Reserve. My first training class included a tour of headquarters in Washington, D.C. I had no idea what a living legend Paul Volcker was until I saw some of the others on the tour race to the head of the board of governors table to grab Mr. Volcker’s cigar butts out of the ashtray to keep as souvenirs. In addition to his economic prowess, he is remembered as being very tall and for smoking cigars.)

Why does history matter?

For the first time in about 13 years, prices are rising and inflation is on people’s radar. This is a new challenge for many Americans born in the last 50 years or so.

This history lesson is important because the current inflation situation is somewhat different than before, so we need to respond differently as well. Especially when it comes to artificial inflation due to pandemic anomalies, we can’t use historical data to make modern purchasing decisions or try to out-guess the market.

Not shocking to anyone, the coronavirus is once again changing the way things work. At least some — if not most — of the rise in prices for things like housing, vehicles, food, and other basics are likely a temporary shift due to shortages and other behaviors tied directly to COVID-19.

What you need to know

From a business standpoint, you may be tempted to make purchasing decisions based on changes in the economy. For instance, you might decide to buy a new piece of equipment now or start an expansion project sooner because you are worried that prices might go up. On the flip side, you might choose to wait because prices are currently high and you are betting the costs will go down.

The truth is that we don’t know what will happen. This is new territory for all of us, so there are no easy predictors pointing us in the right direction.

Instead, it might make more sense to make educated decisions based on your business needs. If you need the equipment now, make the purchase. If your original plan was to build in five years, then perhaps stick to the schedule you created based on strategic planning and direction.

Yes, interest rates may go up — although if I had to bet, I would guess they will remain stable/low for the next few/several years. Prices may come back down, but we don’t really know. The reality is that we are forging new ground and simply cannot predict the future with any certainty.

The best strategy is probably to just do what is best for your current business operations.

Are you thoroughly confused? There is no need to try to figure it all out on your own.

Most business bankers and commercial lenders stay up to date on economic trends and indicators. Contact yours to discuss current conditions or for more information about how they can help you weather any temporary challenges of our unusual pandemic market.

Stanley Koopmans is senior vice president-commercial relationship manager at State Bank of Cross Plains (SBCP). With more than a decade of experience working with commercial and industrial businesses throughout Dane County and beyond, Stan brings a wealth of local expertise to his commercial and business partners.

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